Sybase, Inc. Q3 2007 Earnings Call Transcript

Sybase, Inc. (SY)

Q3 2007 Earning Call

October 25, 2007 10:30 am ET

Executives

John Chen - Chairman, Chief Executive Officer and President

Pieter Van Der Vorst - Senior Vice President and Chief Financial Officer.

Jeff Ross - Corporate Controller

Analysts

Alan Cooke - Merrill Lynch

Robert Schwartz - Jefferies & Company

Terry Tillman - SunTrust Robinson Humphrey

Kirk Materne - Banc of America Securities

Trip Chowdhry - Global Equities Research

Steven Koenig - KeyBanc

Presentation

Operator

Welcome to the Sybase Q3 2007 earnings conference call. This call is being recorded. Our speakers today are Chairman, Chief Executive Officer and President John Chen, Senior Vice President and Chief Financial Officer Pieter Van Der Vorst. They are joined by Vice President and Corporate Controller Jeff Ross. At this time I'd like to turn the conference over to John Chen. Please go ahead.

John Chen

Good morning, everybody and welcome to our call. We'll begin with Pieter providing the safe harbor language.

Pieter Van Der Vorst

Good morning, everyone, and thank you very much. Today certain statements we'll make will be forward-looking statements, including statements regarding our future growth, future operating results, potential business combinations, market opportunities and business prospects. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual results to differ materially.

You are cautioned not to place undue reliance on these forward-looking statements, which reflect our opinions only as of the date of this call. Also, please keep in mind that we are not obligating ourselves to revise or publicly release the results of any revision of these forward-looking statements in light of new information or future events.

Throughout today's discussion we will attempt to present some important factors relating to our business that may affect our predictions. Actual results and the direction of our progress and our future growth, if any, could differ materially from statements we make or imply today for a variety of reasons. Those reasons are described in our press release and in our SEC filings, including our annual report on Form 10-K for the year ended December 31, 2006, and the quarterly reports on Form 10-Q for the three-month periods ended March 31, 2007 and June 30, 2007.

All non-GAAP amounts disclosed in this conference call have been calculated and presented in accordance with the most directly comparable GAAP financial measures which posted in the earnings release section of our investor relations website at www.Sybase.com.

Back to you, John.

John Chen

Thank you. We posted very strong third quarter financial results and needless to say, we are all extremely pleased here with our performance. All three business segments delivered solid revenue and profit contributions that met or exceeded our expectations.

Total revenue increased 22% year over year to $255.3 million. License revenue grew 12%. Services came in at $135.8 million, which included a 4% increase in maintenance revenue, and messaging services came in strong at $34.3 million. Core database license revenue grew 18% and we saw 10% year-over-year growth in revenue in the iAnywhere segment with a 16% year over year growth in iAnywhere license revenue.

Year over year, non-GAAP operating income increased 40% and non-GAAP operating margin is now at 22%. This represents 280 basis points above Q3 2006, which is year ago, and also represents six consecutive quarters of expansion.

As a result, we are raising our EPS outlook for the full year 2007. Additionally, we reported non-GAAP fully diluted EPS of $0.47 a share, which beats consensus earning estimate by $0.07 and exceeded our own EPS guidance.

Cash flow from operation came in strong at $47.1 million. Based on the strength of our expected full year earnings and our year-to-date cash flow, we are once again raising our full year 2007 guidance for cash flow from operations to approximately $210 million. During the quarter, we bought back $32.8 million worth of Sybase shares.

The strong revenue and margin performance in each of our three business segments demonstrate the leverage and growing synergies in our business model. For example, a number of customers including Motorola, Kodak, ING, EMC, Nortel, United Bank of India, just to name a few, have increased their investment in Sybase by buying products that cross multiple segments. Moving forward, we believe we can unlock greater synergies with our increasing number of cross-selling opportunities.

I'd like to spend some time highlighting each of the segments. Starting with IPG, the Infrastructure Platform Group grew 6% year over year to $192.6 million. IPG license revenue increased 12% year over year, driven by 18% growth in our core database license revenue. We added over 300 new ASC customers in the quarter, which represented 78% increase year over year. Our flagship ASC15 enterprise database, our IQ analytics servers, our replication server technology all experienced good growth and good demand in the quarter. The fastest growing part of our core database revenue came, again, from our IQ customers, and a number of new IQ customers.

Just to remind people on the call who is not familiar with our product line, IQ is uniquely qualified for high performance, mission critical analytics as well as very efficient warehousing of huge data volumes.This is also much more cost effective than traditional OLTP engine in executing these warehousing functions and analytics functions in parallel simultaneously, without sacrificing performance. Within our customer base, IQ is best known for application risk assessment, web analytics, profitability analytics and data analysis.

A good example of our win in Q3 was with National Oceanic and Atmospheric Administration, known as NOAA. NOAA uses IQ to collect, track and analyze massive amounts of data collected from lakes, bays and coastal areas of the United States to produce accurate and timely weather forecasting. Currently, worldwide we now have over 1,000 IQ customers.

During the quarter, we also announced two very significant major benchmarks that further validate our price performance leadership of IQ in very large-scale data environment. With Sun and EMM Soft, the email archive software provider, we announced the first 1 pedabyte data warehouse environment that included structured data. Also in the same quarter, Sun announced the best price performance with the Transaction Depositing Console, TPCH, in the 1 terabyte data warehouse category.

IPG operating margin came in at 23%, a very nice grow-over the third quarter a year ago of 19%. We saw meaningful progress in our iAnywhere mobility business, consistent with the guidance that we had made for sequential growth and improved year over year growth throughout 2007. Aided by increasing synergy with IPG, we expected to see sequential growth in Q4 and we are reiterating our guidance for 10% full year growth.

License revenue grew 16% year over year, total revenue grew 10% year over year to $44.4 million. We attributed this strength to two major product lines, SQL Anywhere 10, which is a small database and our Information Anywhere suites -- both of which, by the way, were launched last year in November timeframe. Key customer wins in the quarter included Motorola, Novel, Cardinal Health as well as Siemens. We added a total of 794 iAnywhere customers in the quarter. Industry analysts continue to recognize iAnywhere products and market leaderships.

In its October 2007 report on the worldwide mobile device management market, IDC placed Sybase in the leadership quadrant and named us the market leader. We said for six years. I have to apologize to IDC. Somebody told me yesterday that the report has been in existence for four years so I don't know how we got six years; maybe the predecessor's report. But the important fact is we were named the market leader on mobile device management every year the report was published; every year in a row, uninterrupted.

Our leadership position is based on the robustness of our offerings and tight integration between device management and security. That is what's written in the IDC report. Also, IDC placed Sybase in the leadership quadrant in its most recent report on worldwide mobile middleware market. So we're now number one in mobile device management and one of the top players in the mobile middleware space. iAnywhere operating margin a solid 21% for the quarter, compared with 19% in the third quarter of 2006.

Now we move to messaging. Sybase 365 messaging service continued to gain strength and momentum and deliver faster than expected margin expansion. In the third quarter, messaging service generated revenue of $34.3 million, reflecting strong growth in both application messaging and personal messaging services. We processed 22.8 billion messages in the quarter. Application messages represents the fastest growing category.

This week at the CTI mobile trade show -- which actually happened to be in San Francisco by chance -- we launched the industry's first and only multimedia MMS push platform allowing enterprises to send and receive rich content while eliminating the need for short code. An early adopter of this platform is actually Facebook, which happens to be in the news a lot lately.

Going forward, mobile banking will emerge as a new key driver of our enterprise applications. This also offered cross-selling opportunity within our IPG installed base. We started to see this trend last quarter. Last quarter we reported Citizen Bank was our first customer in the mobile banking messaging services.

This quarter, another one of the existing IPG customers, United Bank of India, with 1,368 branches, has chosen our SMS messaging service as a cost efficient alternative for communicating with their customers via their mobile devices. It's estimated that there were over 150 million mobile phone subscribers in India at the end of last year.

The pipeline -- and this is obviously a repeatable application for us -- the pipeline for similar opportunities worldwide looks very strong. In a related development we also announced our M banking 365 platform this past week. M banking 365 enables banks to interact with customers in real-time through alerts. It also allows the customers to perform secure two-way banking services using their mobile devices. We believe this represents a huge opportunity within our enterprise space. The platform combines messaging service and technologies from IPG, which happen to be financial servers and EA servers; and iAnywhere, which happens to be the answer anywhere solution.

Operating margin from messaging came in at 12%, up from 8% last quarter. This continued improvement is a result of stronger than expected revenue growth and increasing cost synergy despite ongoing investment in Sybase 365 infrastructures and operations. As a result we're on track to exceed our revenue target $130 million for the year and we’re raising our messaging operating margin for the year to the range of 8% to 12% from a prior range of 6% to 8%.

Lastly, we held our annual Tech Wave user conference in Las Vegas where more than 50 financial industry analysts participated -- and many of you were there, thank you -- along with 1,400 customers and partners. The event was well attended and received many, many positive reviews.

Now I'd like to turn the call over to Pieter to discuss our financial results in greater details. Pieter.

Pieter Van Der Vorst

Thanks a lot, John. So let's get right to the math. Overall revenue for 2007 third quarter increased 22% to $255.3 million compared with $209.1 million in the third quarter '06. License revenue for the quarter grew 12% to $85.1 million. Services revenue was $135.8 million and messaging revenue was $34.3 million. All geographies grew year over year.

Total revenue for North America came in at $130.1 million representing 51% of total Q3 revenue. Europe came in at $87.5 million representing 34% of the total, and Intercontinental region, which includes Asia -Pacific and Latin America came in at $37.7 million representing 15% of the consolidated total.

Total non-GAAP expenses for the third quarter increased 18% to $198 million up from $168.2 million a year ago, and this year over year increase is primarily related to the addition of Mobile 365.

Non-GAAP operating income for the 2007 third quarter increased 40% to $57.3 million, representing a 22% operating margin. This compares with non-GAAP operating income of $40.9 million or an operating margin of 20% in the third quarter of '06.

The company reported non-GAAP net income for 2007 third quarter of $42.8 million or diluted EPS of $0.47. This compares with non-GAAP net income of $36.3 million or diluted EPS of $0.40 in the third quarter of 2006. On a GAAP basis, operating income increased 39% year over year to $44.6 million representing 17% operating margin.

This amount includes $2.8 million of amortization of intangibles related to the acquisition of Mobile 365. On a GAAP basis that income increased 36% year over year to $34.1 million or $0.37 per diluted share. A more detailed description of the reconciliation between GAAP and non-GAAP numbers is contained in the press release distributed pre-market.

Our financial position continues to remain very strong. The key highlights from our balance sheet and cash flow statements are as follows: The cash balance at September 30, 2007 was $717.3 million, which included restricted cash of $6.1 million.

Cash flow from operations came in at $47.1 million. Capital expenditures were $5.3 million in Q3. Depreciation for the quarter was $6.8 million. Capitalized software was $10.2 million. Amortization of capitalized software was $8 million.

The accounts receivable net came in at $211.4 million. Then the DSO for the quarter on a consolidated basis was 75 days. Deferred revenue was $199.3 million, up from $191.5 million for the same quarter in 2006.

The maintenance renewal rate for Q3 remains consistent with our historic range of 90% to 95%, and the number of deals over a million represented 21% of licensed revenue compared with 20% in the third quarter of '06. We finished the quarter with head count of 3,991.

During the quarter, we repurchased $32.8 million worth of Sybase stock for a total of $91.4 million year to date, and there remains $158.4 million authorization in our stock repurchase program. Our 2007 third quarter non-GAAP tax rate was 32%. So those are the numbers.

Now I'd like to give it back to John.

John Chen

Thank you. Now onto our Q4 '07 guidance. We anticipate revenue in the range of $280 million to $290 million and a non-GAAP EPS range around $0.54 to $0.56 per share. We expect the GAAP EPS to be in the range of $0.44 to $0.46. For full year 2007, we are once again raising our outlook for full year non-GAAP EPS to a new range of $1.64 to $1.66 from our most recent guidance of approximately $1.56.

Total revenue for 2007 is expected to range from $1.01 billion to $1.02 billion. We're also raising our outlook for the GAAP EPS to a range of $1.25, or between $1.25 to $1.27 from a prior guidance of approximately $1.19.

We are raising our guidance for cash flow from operations to approximately $210 million compared to prior guidance of $195 million to $205 million. Based on our confidence in the business, we continue to believe that the best use of capital at this time is in our own shares. Therefore, we will be ramping up our share repurchase activities this quarter and beyond.

While I'm not giving anybody official guidance for next year, as we are still working on our 2008 plans, we believe we can drive double-digit EPS growth from a combination of revenue growth, margin expansion, and more aggressive buybacks. We will provide more specific 2008 guidance as is customary on our Q4 earnings call in the beginning of the year, January.

Before I turn the call over to Q&A, I'd like to announce a couple of exciting changes and promotions in management. Upon filing the Form 10-Q for 2007 third quarter, which will be about early November, Pieter will assume the roll of general manager of the EMEA region. He'll be moving to London where he'll be paying a lot more money for the rent. He'll be managing the field and business operation in the EMEA region, reporting to Steve Capelli, who many of you have met. Steve is the President of the Worldwide Field Ops.

Pieter has worked with me the last eight years and at Sybase were 15 years building a very deep knowledge of our customer base, our product lines and our business strategy. Without a doubt, Pieter has been an extremely valuable partner to me over these past eight years. I'm excited for him for this opportunity to further expand his contribution to Sybase.

I'm also pleased to promote Jeff Ross, who is here with us today, to Senior Vice President and Chief Financial Officer from his current position as VP and Corporate Controller, a position he's held for three years. Jeff joined us ten years ago as group director of tax and corporate accounting with responsibility for worldwide tax functions and internal financial reporting. Previously, he spent ten years at Price Waterhouse. Both of these moves enable us to maintain operational continuity, while also demonstrating the breadth and the depth of our Sybase management branch.

We take great pride in our ability to develop future executive leaders internally. I'm confident both Pieter and Jeff will succeed and continue to make significant contributions to Sybase in their new roles.

Before I turn the call over to the operator for Q&A, I'd like to invite Pieter to say a few words.

Pieter Van Der Vorst

Thank you, John. First, I'd like to welcome Jeff into the new role of CFO. I hired Jeff about ten years ago and I've worked closely with him for the last ten years. He's risen through the ranks of the finance organization. Jeff is very familiar with all aspects of Sybase and I think he's well prepared for this opportunity. Congratulations, Jeff. I know you'll do a great job.

As for me, I'll be around for the next month to ensure a smooth transition before I leave for London in early December. It has been great working as a CFO with John for the last eight years. John has been a great mentor to me and has been instrumental in my professional development and growth. Over these last eight years I've had an opportunity to work with all different parts of the organization, traveled the globe, meet customers, shareholders and the financial community and grow and transform the business.

Now, I feel ready to take on a new opportunity. I'm very excited about moving to Europe to run this field business operation. As many of you know, I am Dutch so being of European heritage and having spent a lot of time in Europe as the CFO, I am really well acquainted with the operations over there and familiar and comfortable with their culture and way of doing business.

It's really an exciting time to be at Sybase and it's been a rewarding journey for me so far. I look forward to contributing in a new way to the company's growth and development. Lastly, I do want to thank John and everyone within Sybase for their support over the last eight years. I’d also like to thank all of you on the call today for your support for both me and for Sybase.

With that, I think we're ready to go to the operator to take some Q&A.

Question-and-Answer Session

Operator

(Operator instructions) Our first question will come from Alan Cooke with Merrill Lynch.

Alan Cooke - Merrill Lynch

Can you tell us about the strength in database licenses? What do you attribute it to? Did you benefit from deals that slipped from Q2 or was it better execution?

John Chen

Alan, that's a loaded question. There’s never been execution problems. So yes, the very view that I told you all that we did not take, let's say that it was not really ready at the end of Q2 because we didn't like the terms, we did negotiate better terms and closed the deal.

Alan Cooke - Merrill Lynch

How was the pipeline looking in general? Do you have any concerns over spending, particularly within your financial services customers?

John Chen

We have not; that's interesting. I've been monitoring all my peers in the industry and I've been talking to many customers. I was in New York last week also. We have not seen the slowdown in Q3. But I'm a little bit cautious, just being a little guarded. That's why I gave a rather large range of revenue predictions, guidance in Q4 of $280 million to $290 million.

We are very reliant on the financial vertical; as you know, about 20% of our business comes from verticals. So, I'm watching that carefully. We have not seen the signal that people are not buying yet, especially, the pipeline that we're planning on. I have reaffirmed some of those. But it seems like every day there's more bad news on Wall Street. I hope it's going to subside. So, the answer to your question is, it's in some way factored into our guidance.

Alan Cooke - Merrill Lynch

With respect to the iAnywhere business, it had its second straight good quarter. Do you think the execution issues in that business are behind us for good?

John Chen

Well, never say never. We have a much tighter execution. I'm very pleased of where we are in terms of our region and the management of it. We also have increased the cross synergy between iAnywhere and IPG, which helps lot.

Alan Cooke - Merrill Lynch

Yes, I noticed the database business sold more in terms of license revenues. Do you think that will continue?

John Chen

Yes, that's the plan. Just to remind everybody -- Alan, thank you for bringing this up – at the beginning of the year, I told everybody that we're running those three segments. They have a lot of interdependency and they draw on each other's strength. The future is going to come from the synergy among these segments, and we're seeing that.

We're seeing the fields are selling a lot more, the IPG field, the database field, are selling a lot more other products including the iAnywhere product as well as messaging and services product. I point out a few examples of that and we're expecting to see more and more of those going forward.

Alan Cooke - Merrill Lynch

How are you encouraging the field to do more of that?

John Chen

Well it's only one thing. It all comes down to credit and commission structures.

Alan Cooke - Merrill Lynch

And has it changed?

John Chen

We have not dramatically changed it today, but it will continue to evolve. We have a plan to do it in multiple years so that we don't just kind of skew one way too quickly, because we can’t take our eyes off the ball. We're moderating this thing as we move forward.

Alan Cooke - Merrill Lynch

You updated your guidance for Mobile 360 or Sybase 365 for this fiscal year. Are you updating it for next year? Because you had given guidance a year ago on that business as well.

John Chen

No, the reason is we're still doing the budgeting. Yesterday was the first time that Marty and I met on talking about what the budget may look like. So no, we don't have it yet, actually. We may have some sense, but we don't have it.

Alan Cooke - Merrill Lynch

And in terms of synergies between Sybase 365 and the other two business units, what are you seeing there?

John Chen

Well, the 365, let me talk about what 365 actually represents. Because I think there might be some confusion. I hear some shareholders think that this is kind of a side business. We look at 365, if you think about it, as an application server environment for a mobile play. This is no different from an AP server like web suite or web logic for the web-based technology.

So in a mobile world, you need a messaging platform to communicate those APs, to launch and communicate between those APs. So the 365 messaging platform is designed for that and we're moving a lot of technology into it to booster it to be like that.

So we're really not only focusing on being a messaging business, although this happened to be a recently good and exciting business, but it really ties back into where we want to see the enterprise strategy to go. Think about 365 eventually would become the mobile web server.

Alan Cooke - Merrill Lynch

Okay, great. And than in terms of your operating margin, you had a very strong operating margin this quarter, I noticed that sales costs were flat in dollar terms, G&A dollars were down. Can we expect this to continue going forward, and is the operating margin expansion sustainable?

John Chen

Let me talk about it in an overall picture. I think in the beginning of the year, because of 365, we bought in November, we were a little bit more conservative, prudently so, that we said, the margin for the year may be down a little bit compared to year 2006. And then at the last quarter we said it will be flattish. And than now we think it's going to be up from last year.

Prior to that, if you look at our history in the four years in a row, we've been expanding it by 100 basis points every year. So going forward, I think you should continue to expect that we could expand it by at least 100 basis points.

Alan Cooke - Merrill Lynch

In terms of your buybacks, you talked about the fact that you were going to accelerate the buybacks. Do you anticipate increasing the buyback program? And by what sort of measure do you think you'll accelerate the pace of buybacks?

John Chen

Well currently, we have $154 million left in the authorization. Our plan here is to potentially buy over $50 million every quarter at the minimum.

So you should see us going in and buying at that level this quarter, next quarter until we exhaust it, then we'll go back to the board and discuss with the board how we could best use to capital.

Most likely, given our track records, I think by now we have bought back $700 million worth since I came. So we would expect us to continue to do so. Most likely we'll go back to the board and ask for additional approval.

Alan Cooke - Merrill Lynch

Okay. Just with respect to that, though, $50 million a quarter, in all likelihood, your cash balance will keep on going up. Do you need to have all of that cash on your balance sheet?

John Chen

Well, actually this is the subject a lot of people have a lot of opinions on. So the first answer to your question is there are a lot of shareholders that have expressed, you know, their opinion to us that economic environment like this may be it's good to be a little bit more conservative and prudent to hold onto some of the cash.

There is also this concern that, you know, maybe we're just going to go ready for big acquisitions. I can tell you all that I don't have that in mind. We're not working on one right now. That won't say we'll never work on one, we don't have one big acquisition in mind.

Alan Cooke - Merrill Lynch

Okay. Thank you very much.

John Chen

Keeping the powder  dry. As then as we see our cash flow environment continue to do well, economic environment to do well, you may see us even more aggressive on the buyback.

Operator

Our next question is from Robert Schwartz with Jefferies & Company.

Robert Schwartz - Jefferies & Company

Okay. I have a couple of general questions. Maybe we could talk a little bit about the IPG group, which had really had great success. What are the catalysts you're seeing for that success continuing to go forward in IPG? Can you sustain the double-digit growth?

John Chen

Double-digit growth? The plan could sustain double-digits in license. On the segment we've always been planning for around 6% growth and that will imply double-digit growth in license revenue. You're correct.

And yes, the answer to your question, we're planning on that. There are a couple of things that will help us a lot. The ASE 15 is not completely done yet, although you will see that slowdown as we see it. But on the other hand, the IQ engine is swapping up pretty high, very quickly and growing really well, and it has a lot to do with the analytics needs now out there.

Recently, obviously we already closed two deals on risk analytics so in the last quarter and so for all the obvious reasons. I talk about when IQ wins with one other agency there. And so we have seen a lot of pickup there.

Then, of course, next year we got the Sybase cluster comes out. The second half of that into 2008 we'll probably see some good benefits from that, and then a lot of the banking solutions we talk about with messaging will help us sell the database license also.

So a combination of all that, and then there was middleware like web servers and mirror activators, lots of interest out there in the market, we're doing a lot of either proof of concepts or presentations, that should also build up some good pipeline conversion into good revenue.

The answer to your question is the chances are us growing double-digit license in the teens at least of IPG should be part of reasonable expectations.

Robert Schwartz - Jefferies & Company

You had tremendous growth in your messaging, but I think the estimates out there are for something about like 26% growth rate in messaging volume. And you're growing a little bit slower than that. How do I reconcile your share?

John Chen

We haven't even got to the first year yet. I don't know where you got my going slowly.

Robert Schwartz - Jefferies & Company

Industry analysts talking about industry. We've seen reports that say it's growing.

John Chen

I don't have the number to compare to a year ago. I don't think you're right on that one.

Robert Schwartz - Jefferies & Company

Okay. The next question which is for Pieter, if I look at the cash flows from operations, the last four quarters they have been at 70, 54, 47 this quarter and the guidance kind of implies 35. Is there a structural reason why cash flow from operations is sort of trending down for the quarter, quarter to quarter during the year?

Pieter Van Der Vorst

No, I think that if I looked at it, I thought that the number was a little bit higher than that. Our expectations for the fourth quarter would be around -- would be around…

John Chen

Should be about $50 million.

Pieter Van Der Vorst

Yes, it should be around $50 million. So, the 210 million number may be a little conservative. But I think that’s, that at this point, is where we're comfortable.

Robert Schwartz - Jefferies & Company

Okay. That's very helpful. Maybe one more, are you putting any special spiffs around IQ to push its growth and is it being handled by a separate sales organization?

John Chen

No. It's been handled completely by the database sales force.

Operator

Our next question is from Terry Tillman, SunTrust Robertson Humphrey.

Terry Tillman - SunTrust Robinson Humphrey

John, it's nice to see all three businesses do well in the quarter. Pieter, good luck and Jeff, congratulations.

John Chen

Thank you.

Terry Tillman - SunTrust Robinson Humphrey

So, with that out of the way, I guess the one thing, John, I felt like last quarter, I don't want to say you were warning us, but you were giving I thought cautionary language that at some points the benefits from ASC15 will start to wane.

And it almost feels like to, I guess Alan's question earlier, there maybe your tone is a little bit more optimistic, though, or am I reading it wrong? Is it beyond the upgrades and its now about workloads and just new customers?

John Chen

To be honest with you, Terry, I didn't -- I don't think I was negative last quarter. I'm sorry if I came across that way and you all read it that way. I just want everybody to be aware of the fact that, the 20 some percent growth that we’d experienced for a couple of quarters, that is not going to happen because like you see the pipeline and the early adopters already jumped in, the pent-up demand starting to go through the system.

So, but that said, we have 10,000 ASC customers out there. By the end of 2009, they will all have to be upgraded. Okay, now, that doesn't mean that because they are all paying us maintenance and upgrade on a regular basis, that doesn't mean that they will give me any more revenue, license revenue.

On the other hand we expect about 30% of that 10,000 base to upgrade to encryption and or -- I have a mental block. The two options we're selling the most. Partitioning and encryption technology we expect that those two options to penetrate about 30%. So we're not through that process yet. I mean we still have room to grow in that.

Then on top of that when you have a renewal -- when they have to move to upgrade today ASC15 that gives us a chance to sit down with our customers to discuss their future needs, and that would be the another selling opportunity. So you would assume that activities will pick up.

I was just a little more caution for everybody so it doesn't just kind of get overly high on expectation and then we kind of disappoint people along the way with very high bars. And that's the only reason. But there were no negative structural business reasons for me.

In addition to that, in fact, there was a lot of positive in it. And obviously, IQ growing also helps a lot, so both of them are actually driving growth right now.

The shared disk cluster, I've got 12 customers got the software. About half of them already loaded. A couple even have benchmarks they sent us, which all looks very good. And I met one of them, one of the major banks on Wall Street last week on shared disk cluster, which they are on beta and they're very hyped on it. And so we expect obviously they will be one of the early customers on that.

So there is a lot of good things happening for us. I don't want to be overly positive or overly negative. Last quarter if I came across overly negative, I apologizes, because it was not meant to be. This quarter I'm not giving you a different signal they all sudden be overly positive, but I am positive about business.

Terry Tillman - SunTrust Robinson Humphrey

Okay. And then just secondly, with encryption and partitioning being the two key options that have taken hold right now, could you help us though when we start to think about shared disk cluster? First, how would the economics work?

If you get a dollar for each of encryption and partition would it be kind of in parity with shared disk cluster or can you garner more out of each customer on a per unit basis with that option?

John Chen

Okay. So I don't know the answer to the question that way, but let me give you some data points so we’ve got all the pieces together. The data points are -- we also expected about 30% of our installed base will upgrade to share disc cluster over the lifetime share disc cluster, will be probably18 months, I suppose, the early cycle. So, it's priced as exactly as Oracle Rack, right now.

They also see by the way 30 plus% of their space upgraded to Oracle Rack, I mean Oracle database. So, I think we're very, very competitive in that perspective. I don't know if it's one for one. I don't have that particular set of math in my head.

We expected to have about 100 customers sign on and pay us next year. And those mostly will be in the second half because the beta’s going on we’re going to release in the first quarter of next year, the GA. And then, the sale cycle will gradually push us into Q3 and Q4.

Terry Tillman - SunTrust Robinson Humphrey

Okay. That's very helpful. And then just, as I promised, just three questions. The last one as it relates to Financial Fusion and the work you've done in Internet banking. Can you remind us, how many customers you have and what could be the adoption or attach rate of mobile banking with the Sybase 365 technologies in that install base?

John Chen

Okay. So, we have 60 customers worldwide on FFI. And, the mobile banking, Internet banking messaging services, the obvious pool of customers are those 60. I expect high penetration, at least over half of that. So, far it seems to be a pretty easy, understandable and acceptable concept for customers.

But I wanted to make sure everybody knows that this goes way beyond the FFI base. We have a plan to launch pretty much across all i-bank customers, whether it's FFI or not.

Terry Tillman - SunTrust Robinson Humphrey

Okay. Thanks, again.

John Chen

Okay. Thank you.

Operator

And, we'll next go to Kirk Materne with Banc of America Securities.

Kirk Materne - Banc of America Securities

John, in your opening statement you talked about having some cross-selling opportunities across the multiple segments of your business. Can you provide more granularity on that, meaning when you look at Sybase 365 relative to your IPG business.

Do you win the Sybase 365 business because you're a database? If the database wasn't there, would you have won the deal? Was it the same sales guy?

I guess, I'm trying to figure out whether it's the technology, the way you go to market. Because they’re a customer doesn't necessarily mean-- a previous customer doesn't necessarily mean there's synergies there.

John Chen

Absolutely. Good question. Number one; different sales force. Number two; we win a lot by Sybase opening doors and then 365 goes in. And number three; there are a lot of customers, who 365 used to be not able to close the deal. Sybase was able to help them close the deal because of not only our size is relative to 365, but also our relationship with the account.

United Bank, India Bank, that deal is a classic example where they knew us, they are customers of ours on the database side. We're able to take our messaging capability in and close that deal. Prior to that, one of the high profile ones was China Mobile and the same scenario. Citizen’s Bank, same scenario. It's more credibility and door openers and relationship building on that. But no, it doesn't have to be Sybase database. In fact, that has nothing to do with what it is today.

Now, the 365 messaging technology will find its way in combination with a lot of the IPG core technology. And with that like in the IQ analytics world, we could envision seeing mobile analytics. So those, two comes together will provide that our capability. So those are all positive trends going forward.

As I talked a little bit earlier when Alan was chatting with us, you really need to look at 365 as the future AP servers in the mobile world and that has always been our vision. That's been our vision, when we made the acquisitions. Without the messaging infrastructures you really can't do any of the M banking or the M commerce, so application cannot talk to each other. So, this is the vehicle and this is the platform. That's it. That's what we're working towards.

Kirk Materne - Banc of America Securities

Can the Sybase 365 sales reps sell IQ into their customer base right now, or do they have to sort of bring over say an IPG salesperson to do that with them?

John Chen

Only in terms of technical parts. The 365, in terms of rules of engagement, they certainly could rep and sell any of the products, and we have an internal way to settle the transfer of credits. Marty knows that. Marty is very comfortable with that. In fact, Marty is going to start focusing selling one of the iAnywhere products, which is Answer Anywhere, and we just worked that out yesterday.

So, the answer to your question, there's no restriction in terms of, artificial restriction of any sort, but there is a restriction on technical capability. It's one way of selling 365 messaging technology it's a complete different way of selling IQ.

Kirk Materne - Banc of America Securities

Pieter, just around Sybase 365, two questions. First on the gross margin side, looks like gross margins went down a little bit this quarter. Just anything to read into that? I guess, I know it's still within sort of the range you've given, but any thoughts on that?

Heading from December to March, what should we be thinking about perhaps seasonality wise for Sybase 365 from say December to March, does it have traditional seasonality within software’s that should be a little bit more linear?

Pieter Van Der Vorst

Well, we haven't provided any guidance for '08 with respect to what we think is going to happen with 365, so we probably want to wait until the fourth quarter to talk about that.

But there is nothing in my mind unusual about what's going on from a margin point of view. The mix between the a.m and p.m. business we'll have those margins move around a little bit. But nothing unusual in terms of any activities that need to be highlighted.

Kirk Materne - Banc of America Securities

So, I should assume that was more sort of p.m. - heavy this quarter, which is higher volume, higher cost? Is that the way to think about it?

Pieter Van Der Vorst

No, actually no, I think it would be the inverse. I think that shows there's growth in the business, which has a slightly higher burden from a gross margin point of view.

John Chen

Terry, it's also depending on the mix of international versus domestic.I know it's somewhat confusing, but we have it under control. But it's really a mixed part of it.

Pieter Van Der Vorst

There's nothing unusual going on there. That's just the normal mix of the products.

Operator

Our next question is from Trip Chowdhry with Global Equities Research.

Trip Chowdhry - Global Equities Research

Thank you and congratulations on very good execution. A few things, John, what are you seeing in the global markets relatively to say what's happening in U.S. both in core database products as well as in mobile area? And I have a follow-up question.

John Chen

I missed the second part. The database market as well as what?

Trip Chowdhry - Global Equities Research

In mobile, the Sybase 365 market.

John Chen

Right. Right. I mean, the core database, there's no, there is really not much change to the core database landscape. Their entire market is growing single digit, mid-to-high, it's been sorted out, the same competitive landscape.

There are a couple of startup companies in China that would like to challenge our positions a little bit. I really haven't seen a lot of – really pressure from that as yet. The open source world, I haven't seen lots of that either I mean, In fact, I don't think I've seen any. That may be too strong a statement, but it hasn't really bubbled up to me from the sales organization. And it tells me there's something that structurally may be changing.

So, that's that part. And mobile is going really, really fast in 365. The messaging part outside of the United States, are really -- they are really growing. And in fact, that ties up to a little bit of what Pieter explained to Kirk a little about the margin part of it.

We are seeing very robust growth in messaging in Europe, we are seeing very robust growing messaging in Asia Pac. And some of the cost structures there well per messages we do need to deal with. So, but volume will take care of it.

Trip Chowdhry - Global Equities Research

Beautiful. And also, last quarter you announced database appliance, I believe, based on some virtualization technology. I was wondering, are you seeing any pickup on it yet or is it’s still a little early?

John Chen

I feel it's a little early. Obviously, we support virtualizations with Red Hat as well as Microsoft for that matter. And we are working on virtualization with other Linux player. I don't want to name the names right now because we haven't signed anything on the dotted line. We feel like the market is still a little early for us in terms of selling those appliances into those environments.

Operator

And we do have time for one more question is from Steve Koenig, with KeyBanc.

Steven Koenig - KeyBanc

One quick question on each business; let's start with maintenance. A lot of that is IPG. 4% increase year-on-year this year. I assume that some of that was the cost of living kicking in. How long can we expect to see that continue?

John Chen

No, actually that was based on license growth over the last couple of quarters. The cost of living adjustment kicked in actually October 1st.

Steven Koenig - KeyBanc

Does that suggest that we ought to be able to sustain the sort of year on year for a quarter or two or 12 months? Any sense on that?

John Chen

Yes, we've been averaging 4% increase in the last three or four quarters on maintenance. I think that's a fairly reasonable bet.

Steven Koenig - KeyBanc

On iAnywhere can you give us a little bit of a sense for sales execution there? Licenses were good this quarter, services were a little lighter. In terms of the contracts there, how did named accounts do in iAnywhere versus OEM? What was kind of the composition of the business?

John Chen

Interesting. There was only one large OEM deal in the quarter, so I have to say it's going to be more of the name account. Seems to me that the VO base was quite active in the past quarter.

Steven Koenig - KeyBanc

On 365, you're showing some good progress on margin. What I'm curious about is ultimately in the business do you think that you can get those margins to the Sybase 20% level? Especially given kind of the fragmentation in the market for the application business, where can those margins ultimately go? Not this quarter or next or even in '08, but where can we get them to?

John Chen

Well, I'm a stubborn person. I think we could. It depends on what value added services we have. The messaging business itself today, we are doing very well getting the margin into, let's say 10%, I'm sure there's still growth in that. We'll do better than 10%, on a year basis, that is going forward. We're going to look in hosting some of the Sybase core technology like IQ, One Bridge, we are going to wide label some of the technology to go into mobile advertising channeling for telcos, and so it depends on what you sell to telcos.

If the question is just by providing messaging services, am I going to see 20%? Probably not., but I probably will see 10%. But by doing added value services, will I be able to see 20%? I wouldn't rule out at all.

John Chen

I probably won't get there in 2008. I know I won't get there in 2008. I will tell you I will not rule that out in the future.

Operator

With that, I'd like to turn the call to John Chen for a closing comment.

John Chen

Very good. So, thank you for participating in the call today. Jeff and I will be returning next quarter to report our progress and achievement. In the meantime, if you have any questions, please feel free to contact us.

We all wish Pieter the best of luck, as long as he doesn't come over and hug me. Have a good day, everybody.

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